Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Jiangshan Oupai Door Industry Co., Ltd (SHSE:603208) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Jiangshan Oupai Door Industry's Net Debt?

As you can see below, at the end of March 2024, Jiangshan Oupai Door Industry had CN¥741.1m of debt, up from CN¥665.7m a year ago. Click the image for more detail. However, it does have CN¥892.2m in cash offsetting this, leading to net cash of CN¥151.1m.

A Look At Jiangshan Oupai Door Industry's Liabilities

According to the last reported balance sheet, Jiangshan Oupai Door Industry had liabilities of CN¥1.68b due within 12 months, and liabilities of CN¥888.9m due beyond 12 months. Offsetting this, it had CN¥892.2m in cash and CN¥1.16b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥523.5m.

Given Jiangshan Oupai Door Industry has a market capitalization of CN¥4.03b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jiangshan Oupai Door Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Jiangshan Oupai Door Industry made a loss at the EBIT level, last year, it was also good to see that it generated CN¥467m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jiangshan Oupai Door Industry can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Jiangshan Oupai Door Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent year, Jiangshan Oupai Door Industry recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Jiangshan Oupai Door Industry's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥151.1m. So we are not troubled with Jiangshan Oupai Door Industry's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jiangshan Oupai Door Industry is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.